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Best Practices: Tax Lien and Judgment Searches

by Janet M. Dery

Tax lien and judgment searches assist lenders when they analyze their borrowers’ collateral and evaluate their character. The search should be made on the borrowing entity, its principals and, often times, on any guarantors (especially if the lender is lending to the guarantors to ensure repayment of the indebtedness). The search should be run in the county where the entity or individual is located. If an “owners and encumbrances search or title commitment” is required on a piece of real property owned by an entity or individual, the search / commitment will normally include the results of a tax lien and judgment search on the owner.

Always confirm that it does. If no such real estate search is undertaken, the lender should order a tax lien and judgment search on the borrowing entity, its principals and, on occasion, the guarantors.

When the search results are returned, a lender should carefully review them. A tax lien of record usually indicates that there has a been a failure to pay taxes when required. This lien against the assets of the entity or individual will typically have priority over any interest that the lender may have in those assets. A judgment holder, having the right to pursue the assets of the entity/individual to satisfy such judgment, may even pursue a principal’s interest in the business.

The next step for the lender is discussing the search results with the entity or individual. Sometimes, there can be more than one person with the same name in that County, so obtaining a sworn affidavit from the individual that he/she is not the same individual identified in the search results is all that would be required. Oftentimes, the lien or judgment has already been paid, but no satisfaction has been filed to remove it of record. In those situations, the entity or individual should contact the lien or judgment holder to obtain the satisfaction and have it filed in the County.

If the lien has been properly filed, then the lender needs to learn more about the basis of the lien or judgment. If the tax lien included a payment plan to satisfy the amount owed, the lender may be comfortable with proceeding with the financing without requiring full satisfaction of the lien. However, before proceeding, the lender should make sure to obtain documentation of the payment plan and confirm that payments are current. A lender may also want to monitor payments during the term of the loan to ensure they continue until the amount is paid in full.

For more information regarding the importance of tax lien and judgment searches and their impact on collateral and character, contact Janet at jdery@starfieldsmith.com or at 215.542.7070.